SoFi Strikes Back With A Punishing Blow

SoFi Technologies, Inc. (NASDAQ:SOFI) investors have received a significant boost from the conclusion of the debt ceiling saga, which provided clarity to restarting the leading digital finance company's stalled student loans business.

As such, the student loan pause "is set to end on August 30, 2023," which could help to rejuvenate refinancing originations in that segment. Keen investors should recall that student loan originations fell from "$2.4 billion in Q4 2019 to $525 million in Q1."

As such, I assessed that the market likely priced in the near-term optimism with the impending commencement of repayments, providing SoFi with another critical support toward its year-end guidance.

Therefore, SOFI dip buyers who braved the extreme pessimism in May to buy the steep pullback have been rewarded, as SOFI surged toward its March 2023 highs. Weak SOFI short-sellers who loaded more bets in mid-May likely saw their positions scorched as SOFI rose nearly 65% through this week's highs.

I presented before that SOFI is a highly volatile stock, given its unprofitability and short-selling interest. However, the company is also tracking toward GAAP net income profitability exiting 2023.

As such, I parsed that it should provide more confidence for dip buyers to pounce on significant pullbacks like the ones we saw in May, as I highlighted "another fantastic dip-buying opportunity" after its first-quarter earnings release.

The extreme pessimism in May likely centered on SoFi's personal loans business, as bearish investors pointed out the lack of personal loan sales to investors. Bears see it as a worrying trend of potentially weaker underlying demand for SoFi's loans, worsened by the intensifying macroeconomic headwinds.

However, SoFi CEO Anthony Noto rebutted that thesis in a recent conference in May, indicating why the company decided to hold the loans on its balance sheet. Noto stressed that SoFi could earn a more attractive return, considering several factors, including the current market dynamics.

As such, he assured investors that SoFi remains in control of its opportunities, implying that SOFI holders should not be swayed by false narratives. Noto articulated:

The company's primary focus is to maximize returns on equity and invested capital. The decision to hold or sell loans is based on assessing the return on equity and considering the balance sheet risk management. By holding loans, the company expects a higher return on assets (6% ROA) compared to selling them (4% ROA). From an ROE perspective, holding loans can result in a higher ROE (approximately 43%) compared to selling (high 20%). - 51st Annual JPMorgan Global Technology, Media, and Communications Conference 2023

As such, I assessed that Noto's reassuring commentary helped allay unnecessary fears about SoFi's ability to maintain its profitability guidance and balance sheet capacity.

Moreover, I think SoFi's more than $10B in deposits in Q1 (up from $7.34B in Q4) demonstrated that it wasn't caught in the deposit flight, underpinning a stabilizing influence on its lending activities.

SOFI dip buyers who braved the storm in May have been rewarded, as SOFI surged toward highs last seen in March 2023.

However, I assessed that SOFI's price action is no longer constructive, and dip buyers are also not likely to participate at the current levels.

Chasing momentum at these levels could be perilous, even as some investors might anticipate a breakout to catch more short-sellers unaware.

Moreover, SOFI's balanced valuation (rated "C-" by Seeking Alpha Quant) indicates that there isn't a highly attractive valuation dislocation for investors to capitalize on.

Still, I think investors must consider that SOFI is no longer in a medium-term downtrend, as it has reversed decisively in May. Therefore, the subsequent pullback from the recent momentum surge could be telling, indicating where dip buyers could be attracted to return to support the nascent uptrend recovery.

As such, SOFI holders might not need to worry too much about catching falling knives at the next pullback, bolstering more confidence in dip buyers to add more aggressively.

Rating: Hold (Revised from Speculative Buy). See additional disclosure below for important notes accompanying the thesis presented.

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